Operations management literature proposes many different contracts to
coordinate a simple supplier-retailer channel. Generally, when these contracts
are tested in a laboratory setting they do not work as the standard theory
predicts: the supplier, even when endowed with all the bargaining power, is
able neither to fully coordinate the channel nor to extract all of the channel
profit. This is consistent with the existing data on the Ultimatum Game
experiments, which are similar to contracting games studied in the supply chain
literature. We extend the existing body of research in supply chain
coordination by providing a model that incorporates the desire for fairness
into the supply chain contracting setting, and characterize the supplier's
optimal profit-maximizing contract when faced with a retailer who demands her
fair share. We test the model using a laboratory experiment and find that it
explains and predicts contracting outcomes significantly better than the
standard theory.